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Sunday, 21 December 2014 22:00

Craft beverage roundtable: Growth drives craft beverage producers to focus on evolving their business models

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Participants in the MiBiz craft beverage roundtable hosted at Founders Brewing Company’s corporate offices included, from top left, John Wiegand (MiBiz), Tim Suprise (Arcadia Brewing), Jason Spaulding (Brewery Vivant), Max Trierweiler (Mitten Brewing), Pat Evans (Mitten Brewing), Mike Stevens (Founders Brewing), Joe Boomgaard (MiBiz), Joe Infante (Miller Canfield), Walter Catton (Coppercraft Distillery), Paul Vander Heide (Vander Mill Cider), Garry Boyd (BarFly Ventures) and Brett VanderKamp (New Holland Brewing). Participants in the MiBiz craft beverage roundtable hosted at Founders Brewing Company’s corporate offices included, from top left, John Wiegand (MiBiz), Tim Suprise (Arcadia Brewing), Jason Spaulding (Brewery Vivant), Max Trierweiler (Mitten Brewing), Pat Evans (Mitten Brewing), Mike Stevens (Founders Brewing), Joe Boomgaard (MiBiz), Joe Infante (Miller Canfield), Walter Catton (Coppercraft Distillery), Paul Vander Heide (Vander Mill Cider), Garry Boyd (BarFly Ventures) and Brett VanderKamp (New Holland Brewing). PHOTO: KATY BATDORFF

The evolution of West Michigan’s craft brewing industry can be measured in more ways than the growing volume of beer they produce.

It can also be assessed by the quality of processes they’ve put in place to manage their increasingly sophisticated operations. Instead of chasing volumes, executives have shifted their focus more to profitability and perfecting the business models and strategic plans that drive their companies’ successes.

The example set by the craft breweries has also charted a course for other players in the craft beverage industry, ranging from cider producers to distilleries to meaderies.

To explore the transformation of the sector, MiBiz convened craft beverage executives for a wide-ranging roundtable discussion on the competitive landscape, the maturation process of their business operations and the role the industry plays in the West Michigan economy.

Participating in the roundtable discussion were:

  • Garry Boyd, managing partner of Barfly Ventures LLC, an operator of bars and brewpubs including Grand Rapids Brewing Company and HopCat, which is in the middle of a regional expansion.
  • Walter Catton, co-founder of Coppercraft Distillery LLC in Holland, which opened earlier this year.
  • Joe Infante, partner at Miller Canfield Paddock & Stone PC in Grand Rapids who runs the firm’s alcoholic beverage team focusing on regulatory compliance.
  • Jason Spaulding, president of four-year-old Brewery Vivant in Grand Rapids.
  • Mike Stevens, CEO of Founders Brewing Company, which has started an expansion project that will take up an entire city block in Grand Rapids and give the company the space to potentially produce 900,000 barrels of beer.
  • Tim Suprise, president of Arcadia Brewing Company that started in Battle Creek and added a Kalamazoo brewery and pub this year.
  • Max Trierweiler, co-owner of Grand Rapids-based The Mitten Brewing Company LLC, which is in expanding into a new production facility.
  • Paul Vander Heide, co-founder of Spring Lake-based Vander Mill LLC, a producer of a growing line of ciders.
  • Brett VanderKamp, president of New Holland Brewing Company LLC, a Holland-based brewer and distiller that’s planning an expansion to Grand Rapids.

Here are some highlights from their conversation.

What’s your outlook for the new year? What’s next for your companies?

Suprise: I’m happy to say that getting our 2014 expansion behind us will get us a chance at Arcadia to get back to a few of the regional markets that we had been in for a few years prior to having to pull back. We’ve taken a pretty measured and deliberate approach to our growth. We didn’t build an awful lot of capacity into our facility, about 59,999 barrels is the maximum that can get produced on the site that we’re in. Given that we expect to be at or about 14,000 or 15,000 barrels this year, that gives us plenty of room to grow in our model, staying really focused on the Midwest. We’ve got a pretty cool space there in Kalamazoo that we’ve yet to fully develop.

Boyd: At HopCat, we’re expanding the brand; 2015 for us is going to be a huge year. We’re going to do a lot of stuff that we’ve never done before. We’ve been positioning ourselves for the last year to do this.

Stevens: For us, ’15 obviously is about the expansion. It is a large expansion, but quite honestly, our leverage ratios are the smallest they’ve been even at the dollars that we’re sinking into it. We look at that quite heavily. We’re going to wrap that up mid-year. That’s our focus and our goal.

Spaulding: For us at Brewery Vivant, we have a goal of 5,000 barrels, which we’ll be close to at the end of this year and we’ll hit next year. I see it being a powerful thing. We have a goal of so many barrels, and that’s as much as we can make. Going forward, we’ll have to start choosing who we’re going to partner with. … We can only make so much.

Trierweiler: 2015 is going to be a little different for us. We’re going to focus on consistency more because we’re going to start looking for tap handles. Up to this point, we’ve embraced our smallness. From one batch to the next, it doesn’t need to be exactly the same and we try to get as close as we can. Once we get that 20-barrel up and running, that consistency is going to be very important to us.

Catton: We spent heavy last year in capital for startup, so for us (next) year, it’s getting to full utilization. We’re not looking to open new markets. We’re looking to go deeper and broader to the markets that we’re in. And then, collaboration, relationships and continue our networking. (Our focus) will mainly be on production and building our distribution relationships.

Vander Heide: We’ve got a rat race right now in the cider industry. It’s been the fastest growing category at 60 to 80 percent. … We’re trying to stay focused on what’s in front of us and not worrying about what’s coming up behind us or who else might be in the industry. We’re going to continue to expand as we see the opportunity to do so. We’ve got a challenging mission like these guys have in years past with craft beer in that there’s a lot of education necessary for cider right now. We’re doing the best we can to try to educate people and try to show them a different product to what they’ve had before.

Are there any particular challenges that stand in the way of your growth as you’re starting to plan for 2015?

Boyd: We have some challenges that we’re learning as we leave the state. Michigan is craft beer-centric. There’s a lot of things going on here. … We’re going into markets now where they’re not necessarily as ready for it as Grand Rapids was even seven years ago with what was going on in the Michigan beer scene then.

Vander Heide: The phenomenon for me is even worse: Cider is that much further behind craft beer. … We’ve got some of the bigger brands throughout the country that are just owning some of these other markets for our category just because, outside of Michigan, unless you’re up in the northeast or northwest where it’s more apple country, you’re teaching (customers) from the ground level.

Spaulding: Michigan’s got a strong enough culture that they’re kind of keeping some of the other regional breweries in neighboring states from attempting to distribute here. Some of them try, but I think we have such a strong Michigan culture of beer that it makes it less attractive. Everyone’s looking at Michigan, but I think it’s harder and harder to get into our market than they might have thought.

Stevens: It’s no doubt a hard market to penetrate, but I would also argue that it’s also hard for all of us to penetrate California, Texas, Florida. We’re obviously very strong in the Midwest — that’s half our volume. If you can’t do it in your backyard, then you’re really going to struggle because the numbers get pretty small as you get farther and farther out. The growth is there, but it’s from a much smaller base.

Trierweiler: I think that’s why all these small microbreweries are doing well because I think everyone is trying to (feed) the local-centric movement. You have neighborhood breweries popping up.

Stevens: We’re struggling trying to get (tap) handles because there are so many little local brewers out there that deservedly should command a handle or a spot on the shelf. In my mind, (Founders’) business strategy was if you can get to that top 10, top 20 craft brewery status, then you’ve at least got a place on the stage and that will at least help isolate you from those problems.

How do your businesses keep evolving to become more sophisticated given the growth most of you have experienced?

Vanderkamp: From New Holland’s perspective over the next three to five years, we see continuing growth, but we’ve really shifted big time to measuring our growth based on revenue and stopped looking at volume. Certainly, we keep an eye on volume and make sure we’re plugging along. But really, revenue and getting healthy on the balance sheet and the P&L, that’s where I see it going.

Suprise: We’ve shifted our focus a little bit — as a part of our expansion — away from total revenue generation and more to profitability and being in the areas and markets that made sense for us, geographically and philosophically, from a culture perspective.

Stevens: We are more focused on distribution than volume. We identify distribution points by a grade and those are the ones we attack, so that we’re not getting into the B and C accounts. We focused on distribution and rate of sale. As long as their distribution is growing and our rate of sale is continuing to grow, wherever the volume ends, it ends.

We also look at the bottom line number for us. That KPI that we drill in on is the EBITDA margin (earnings before interest, taxes, depreciation and amortization). We have a pretty high EBITDA margin, and we don’t allow ourselves to make decisions that would allow us to go below that. We won’t approve our budget at a board level if the EBITDA margin isn’t where we want it to be. That keeps you in check both on your revenue side and your expense side so you don’t start doing dumb things or discounting or pricing incorrectly.

Spaulding: When Brett and I started New Holland, I didn’t know what HR meant, and now we’re all talking about EBITDA and stuff like that. (Laughter.) I think the business side of things is really starting to develop in this industry. You do have to be a smart business person. … We have to be efficient in our brew house. We can’t have empty tanks. We’ve got to maximize what we can make. We don’t want to leave people short.

Vander Heide: It’s getting more and more critical with the growth that we’ve had to really work on the process elements of the business. With fast growth comes a lot of opportunity for failure if you don’t get things figured out. For 2015, a big part of it for us is getting the right people in place and making sure that we have the ability to grow as the opportunity presents itself.

Boyd: We changed the way we communicate as a company. Instead of looking back at the week — we used to do a week in review — we look out, and we focus on the people in the company and the people coming through the doors, whether that’s the front door or the back door. We focus on the quality of the experience and the product. Every communication starts with people and quality and then there’s a third one that we don’t really spend that much time with, which is profit, because we think that the top two lead to the bottom one.

Can craft beverage companies access the necessary capital to grow and expand?

Infante: From my perspective, the problems are still finding financing. So many of my clients just can’t get money. Banks just aren’t lending to them for the expansion. I’ve got at least two or three right now who want to expand, but are just having a hard time getting (financing) — and they’re profitable. The banks are looking at the industry, and a lot of banks just don’t understand the growth that’s there. They still lump (craft breweries) in with restaurants and (their) failure rate.

Spaulding: I did talk to one banker who said that they’re all excited to loan breweries money, but there are so many breweries opening that now they’re worrying about it. They think the bubble is going to burst and they’re going to get caught.

What are your options if the banks won’t lend?

Stevens: Raise equity. That’s how we did it. A lot of us in this room started that way. You bring equity on and then you bring some debt into the picture as you can.

Vander Heide: Or you just have to wait. I haven’t experienced it. Our business over the last three to four years, volume-wise, has been 100, 125 percent growth, so it’s like hanging on to a fast horse. Frankly, our bank has been there with us every step of the way. It’s SBA deals, which can be cumbersome and take a long time, but we have been able to support the growth just by showing profitability and opportunity. … I don’t know that I would have gotten any of our last two financing deals if I hadn’t been beating on the banker’s door. That persistence, I think, is necessary.

Catton: Persistence with results. From a distilling standpoint, we lay (product) down and then we kiss it goodbye. We’re a working capital nightmare. Everything we put into a barrel has to age, two, four or six years, so I don’t get the immediate return. The first couple of years, you’re selling clear spirits at a dismal margin. We have zero value and your bank won’t give you value for your inventory. They can’t take possession of it, they can’t take a position in it. So it has to be non-collateralized and you have all these barrels sitting around that are worth nothing — but all your money’s in the barrel.

Given the struggle with financing, how do the new intrastate crowdfunding rules play into your industry?

Trierweiler: I don’t think it will play a very big role. You’ve got to be careful of who you go into bed with, too.

Vanderkamp: That’s where I see big problems with it. … Say you’re incredibly successful and you’ve just done this crowdfunding platform. Are you going to have a class action lawsuit? Are people going to be coming back for you saying, ‘Well, I did give you that money. Now I want a piece of your company.’

Spaulding: When you’re trying to start something and you’re running into all these roadblocks, there’s a desperation. Your approach with banks is off, or your business plan is not good. You’re trying to do anything you can. I can see why people would try to do it, but I don’t think it’s a good way to go for our industry. But I’m sure some people will do it.

Vander Heide: It’s time to be a grown-up and go borrow some money.

Are you saying that the owners need to be more vested in their ideas?

Vander Heide: There’s a Churchill quote: If you play for more than you can afford to lose, you’ll learn the game. That’s another part of crowdfunding. In order to be a successful small business owner, I think you have to jump in with both feet and you have to believe in it so strongly that you’re willing to give up everything to make it work.

Catton: (People wanting to start a craft brewery or distillery) say, ‘I’m going to do this part-time while I keep my full-time job. I’m going to do this nights and weekends.’ My advice is always … if you’re going to do it, you’ve got to go all in. You’ve got to feel that sense of drowning at some point.

Stevens: (Sometimes) for years and years. I wrote a business plan 20 years ago, quit my job and said, ‘This is what I’m going to do.’ We never broke even until 2008, 14 years later.

How can craft beverages be competitive with the much larger, well-capitalized international brands that have dominated the market for so long, particularly as they’ve started to acquire small craft breweries across the country?

Suprise: We have to continue to be culture-oriented. … When you look at what’s going on in today’s millennial market, these guys are targeting the same people that we are — with a lot more dollars and a lot more creative (resources) to sell what we consider to be less than the culture of our product. They’re going to come at it from a different perspective, and I think we can all count on that. We all have to be true to our culture in the face of whatever that next phase will be.

Trierweiler: It will be interesting to see how the consumer reacts to whatever they decide to do. Thus far, the consumer has been smarter than them. They’re trying to buy people out and put out craft beer products, but everyone points the finger back to the big brewing industry and everyone knows they’re not buying it.

Stevens: I think the big guys are going to buy maybe four to six breweries apiece. It’s going to be based on geography, and they’re going to own a piece of this pie. They could own three or four million barrels of the pie. My money is betting that’s going to take place in the next couple of years. … The big guys are smart, and they do have a lot of money, and they’re going to get in. It doesn’t mean they’re going to own a big chunk of it, but they could be selling 30 percent or 40 percent of the volume.

Vander Heide: In the cider world, these guys did not wait like they waited with craft beer. You’ve got national brands that launched in no time with Sam Adams and Miller and Bud. I think… there’s so much market share yet that all these guys are doing is all the heavy lifting for us. If they’re going to turn a Miller Lite drinker into a Miller Lite Cider drinker and get them into a product, eventually they work their way through that and get to us.

How else could corporate-owned craft operations or even the largest craft producers affect your business?

Stevens: There’s a lot of competition out there when it comes to pricing. I don’t think it’s going to turn into an ugly war. I just think there’s going to be a bit of an adjustment that has to take place.

Vanderkamp: It is a part of a bigger question of chasing volume versus quality and how you build your business model. Certainly, people are building their business models that want to move a lot of volume through and that’s going to put a downward pressure on pricing for all of us.

What’s driving the growth in the consumers’ palate for craft beverages?

Stevens: If you really stop and think about the simple fact that (today’s) kids saw mom and dad growing up drinking nothing but a New Holland, a Founders, a Bell’s — craft beer — they don’t really know what the hell a Budweiser or MillerCoors is. That, to me, is key for the future. We’ve got a whole new generation that’s growing into beer that did not grow up in the big domestic beer world. You’re not going to take that away. For that consumer, it’s hard to bring that palate back down to a light domestic beer.

Vanderkamp: When people want to learn more about real people making real beer in their community, that’s where we need to shine. It’s back to the point about culture and being true and being real.

Spaulding: That’s why brewpubs are so important because it helps create that culture. The big breweries are never going to do that.

Boyd: When you look at how the country was founded, the center of the community was a brewery. People brewed beer at home. We’re slowly making our way back to this. The center of the community is all these little pubs.

Suprise: We’re all patriots.

Back to the notion that we’re in a craft beer bubble: How do you counter that argument?

Vanderkamp: We view it as this is actually more of a pendulum swinging back to normal as opposed to where we were in a bubble that was peaking in the ’80s and ’90s with the big beer when we were down to so few folks and the industrialization of the industry. We think it’s moving back to more of a balance. I think we have a long way to go yet.

Stevens: I think the big domestic guys could be nothing more than a tiny little blip in the whole history of beer. The way it’s been for centuries has been lots of breweries. They might own 100 years of the beer history, but that’s tiny. They’re 10 percent of the history of beer.

Looking out at the other two tiers of the beverage industry — distribution and retail — what’s the lay of the land these days?

Suprise: The middle tier, the distribution tier: As we’re exploding, they’re reducing. That’s a consideration for us. It may not be a competitive threat. It may be a strategic opportunity depending on who you’re aligned with and how it’s working out. But nonetheless, it’s a landscape and a potential game-changer if it keeps going like this. From a retail perspective, there’s only so much shelf space. We are not going to see the age of 80- or 100-foot cold boxes any time in the near future, certainly from the biggest and most prevalent distribution points in the state — the major chains.

How does distribution factor into the business model for craft breweries going forward?

Suprise: Those business models for those smaller breweries that are just getting started, they’ve got to have the right model, the right capitalization plan, the willingness — if they’re in that packaging component — man, you’ve got to slog it out into a really competitive market.

Stevens: I think the days of opening up large are very, very dangerous. It is very, very competitive. The amount of SKUs that are coming out far outpace the rate that the shelf space is growing.

Spaulding: For us, our model is to stay small on purpose. … There’s a lot of danger if you have to sell so much beer to pay for all this equipment that you just purchased, and there’s only so much shelf space, and it’s going to continue to get more competitive, and there’s only so many taps. Sometimes, just being a local brewpub is a strong model in itself. You don’t have to try to do everything. You don’t have to get bigger and bigger and bigger. If people spend too much money at the wrong time and the shelves are already full, I think that’s the danger.

Stevens: We all have to make our own business decisions and create our own models. We were getting to the point that we were getting large enough that we weren’t really a small regional (brewery) and yet we weren’t national. For us, the decision was let’s go at it for the next two years and get national. (At the retailers), let’s face it: 300 breweries are not going to have space on the shelf. So put yourself in whatever market you want to be in, be smart about how you finance it, always make sure that you’re not over-levered and you can weather through any storms, and that’s just what you do.

There are many places around the country that are known for craft beverages, whether it’s wine in California or beer in Oregon. What can West Michigan do to foster its own identity within the national craft beverage scene?

Spaulding: I think we have our own culture here. It’s significant, it’s noticed nationally. I think we’ve got bigger tasting beers in Michigan than in other parts of the country. Part of that’s just the tradition of beer that we’ve established already from Bell’s to Founders to moving on. That’s our thing.

Stevens: When we started, I can remember Dave (Engbers) and I talking about, ‘Well, we better at least make beers as good as Bell’s or better or we’re not going to make it.’ The bar has always been pretty high, and I’m sure it’s kind of the same theory now as people open the next brewery. ‘Well, we better be at least as good as New Holland or Founders in making beer.’ It keeps evolving and the bar just keeps going higher and higher and higher.

Vanderkamp: To Jason’s point, I think we have a real breadth of product that we’re producing. … I think one area we could all push further on and that we all support is local ingredients to give us our own terroir, if you will. There are some opportunities that we’re seeing with some Michigan-strain hops that were discovered growing wild. We continue to support them and cultivate that and get a unique flavor profile to some of our beers. I don’t know if it could be a game-changer in the next five years. But certainly, looking out 10, 20 years, I could see that becoming really key and giving us more of a Michigan identity.

Catton: We contracted with a local farmer for a certain plot of land, basically, for the rye and the wheat and the spelt and the triticale and whatever he’s growing is all for us. But next year, it’s going to taste different and you’re going to have variation in product. To the terroir point, we’re going to celebrate that. … Rather than try to blend it away and get that consistency, I think one of the benefits we have as a small producer is to say this rye is going to taste different. It’s got a little more character.

Why do you think there’s so much attention being paid to the craft beverage industry in West Michigan these days?

Vanderkamp: The story is much larger than craft beer or spirits or cider. I think what you’re seeing is a return to craftsmanship and I think we’re just fortunate that we’re on the front wave of it. People are very emotionally attached to the beverages because you’re ingesting it and it’s something very personal. I see craftsmanship making a huge resurgence here in the next five to 10 years. Whether you’re a saddle maker or whether you’re a shoemaker, I think it’s a much larger trend than what we’re seeing. We’re on the front edge of it.

Trierweiler: We’re also changing neighborhoods. That was one of our goals when we went over (to Grand Rapids’ west side neighborhood), and I can’t believe it’s happened so quickly. We wanted to revitalize the neighborhood, and that’s what craft breweries are doing. I think we’ll see it in Cedar Springs, we’ll see it in Newaygo, we’ll see it all over the place.

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